April 25, 2022
With a rocky Q1 in the rearview, investors are understandably concerned about what comes next. Equities continue to suffer from heightened volatility with the S&P 500 down -10.37% for the year and the Nasdaq and DJIA down -17.93% and -6.91%, respectively as of market close on Friday. Rising inflation, an increasingly aggressive Fed, continued geopolitical tension, and recession fears are weighing on investors and the markets. And these events are all happening in a midterm election year, historically a volatile year for stocks as political uncertainty mounts. The key question for all investors is when will the selling turn into buying. It’s impossible to know for certain, but there is an interesting history to Mid-term election year stock performance that may give investors hope for positive stock market returns in 2022.
Historically, markets experience higher volatility and larger selloffs in midterm election years, declining -19% on average, compared to -13% for the other three years of the four-year cycle. The chart below illustrates midterm year market corrections and subsequent rebounds dating back to 1962. Fortunately, the volatility tends to be temporary with stocks up +32% on average off the midterm election year bottom.
More pronounced market pullbacks are common in midterm election years, 2022was just larger and faster than usual. Interestingly, the first quarter of 2022 looks eerily similar to the S&P 500 in 1982, the last time we dealt with inflation, Russia, and midterm elections simultaneously. Stocks rallied in the fourth quarter to finish the year in positive territory.
Market returns tend to be muted until late in midterm years, with most of the annual return coming after the elections in November when uncertainty is lifted. Historical data shows that the fourth quarter of the midterm election year and first quarter of the following year boast the two strongest returns of the presidential cycle.
This is the 19th midterm election year since 1950. In all 18 of the prior midterm election years, the S&P 500 experienced a significant intra-year decline followed by a positive return a year later.
The fact that stocks have rallied in the 2nd half of every mid-term election year since 1950 certainly does not guarantee it will happen this year. But it is an impressive streak to keep in mind.
Q1 earnings season is underway and will provide important insight to the pace of growth. Expect a lot of headlines over the next few weeks as investors digest results and guidance. Good reports are generally positive for stocks if they can overshadow the negative news. Stay Tuned.